Will New Highs Bring Clear Skies for Stocks?

Three hundred and ninety-two days. That’s how long it has been since the S&P 500 Index last notched a new 52-week high, way back in May 2015.

It has been a frustrating trading range that continues to test the patience of investors – with not one, but two, sharp stock market corrections of 12%-plus since then.

In recent weeks the S&P began closing in on the highs once again. Will this time be different?

Will stocks finally vault to new highs; and then what?

Right now, most investors would probably answer: Another sharp downside correction will almost certainly come next.

After all, that has been the pattern recently. But don’t jump to conclusions just yet; here’s why:

Uncertain times for stocks.

Granted, you can see this pervasive pessimism reflected in negative investor sentiment nearly everywhere you look.

The so-called “dumb money”: Data from the American Association of Individual Investors shows the percentage of those who are bullish fell to just 27.5% last week, while the share of bears is higher at 27.8%, as has been the case for most of 2016.

Also, the ProShares Short S&P 500 ETF (SH), an easy way to wager on a stock market decline, has attracted $1.6 billion in new assets so far this year from retail investors and traders, even as the market has rallied relentlessly higher!

The so-called “smart money”: Institution asset managers have close to the smallest long position in S&P 500 futures than at any time since 2012. The only time they were less long was at the bottom in August 2015, and again in February 2016!

And the smart-money crowd was recently net-short the Nasdaq 100 Index (see chart above). That’s also about the most bearish they have EVER been over the past three years.

In short, investor sentiment is so BAD right now, that it’s probably GOOD news for stocks!

From a true contrarian’s perspective, it doesn’t get much better than this. When investor confidence turns this negative, usually the opposite happens from what everyone expects.

“Mr. Market likes to fool most of the people most of the time.”

Remember, Mr. Market likes to fool most of the people most of the time. Right now that would mean a new high for the S&P 500 followed by – not another correction as so many expect – but a further rally to even higher highs.

And historical precedent suggests that is exactly what may lie in store for the stock market.

You see, it’s been a long while since the S&P 500 notched a fresh 52-week high – and in the past that’s been a very bullish indicator.

History shows that whenever stocks take “a long pause” between 52-week highs and then finally manage to breakout to the upside, the S&P 500 goes on to post even bigger gains over the following year, according to Merrill Lynch research.

Their data show that whenever stocks go more than 300 calendar days without a new 52-week high, the S&P 500 is up 91% of the time over the next year, with average upside gains of 15.6%.

That’s far better that the average one-year gain of about 7.5% for stocks since 1929!

Such a bullish signal has only happened 23 times going back to 1929, and it has produced well-above-average gains for stocks 9-out-of-10 times in the past.

The market is very close to triggering another bullish signal right now!

The number to watch is 2,128.28 on the S&P 500 Index. That’s the most recent 52-week high.

If the S&P is able to close above that level, it could very well be just the start of an even stronger rally to S&P 2,400 or more, if history is a reliable guide.

Let me know what you think: Will new highs finally bring clear skies – and higher highs – for the stock market?

Or will it usher in yet another frustrating correction. Join the discussion below to give me your thoughts!

Good investing,

Mike Burnick

Other Developments of the Day

Welcome to China: Walt Disney Co. opened Shanghai Disneyland, its first theme park in mainland China, holding a major celebration featuring Communist Party leaders, Sleeping Beauty and other Disney characters. The park represents a $5.5 billion investment. “This is one of the proudest and most exciting moments in the history of the Walt Disney Co.,” Disney CEO Bob Iger said.

Analysts have said that Shanghai Disneyland could become the world’s most-visited theme park, attracting anywhere between 15 million and 50 million visitors a year. The park should generate $1.5 billion to $4.5 billion a year in revenue, according to Drexel Hamilton analyst Tony Wible, the Associated Press reported. Disney’s state-owned Chinese partner, the Shanghai Shendi (Group) Co. Ltd., which owns 57% of the park, will receive most of the revenue.

Premiums for health plans sold through the federal insurance exchange (better known as Obamacare) could increase more than at any point since the Affordable Care Act marketplaces began in 2013, the Washington Post reports. It cited an analysis by the Kaiser Family Foundation that shows that proposed rates for benchmark silver plans are forecast to go up an average of 10% across 14 major metropolitan areas.

Meanwhile, the White House is urging states to be more aggressive against health insurance companies to prevent such premium hikes. Customers are likely to get the notice regarding their new premiums in November, just before Election Day.

Sanford Wallace, a self-proclaimed “spam king,” was sentenced to 30 months in prison and ordered to pay hundreds of thousands of dollars in restitution for bombarding Facebook users, according to court records, NBC News reports. Wallace, 47 pleaded guilty in August to electronic mail fraud and to criminal contempt of court.

The contempt charge was leveled against Wallace for disobeying previous orders from one of his many court cases never to access Facebook in the first place. According to the 2011 indictment, Wallace illegally obtained Facebook users’ account information to lure them into clicking on a link that would download their friend lists and redirect them to other websites. Prosecutors said Wallace flooded more than 550,000 Facebook users with more than 27 million spam messages.

Soccer-related violence continued in France. Police used tear gas to disperse rampaging English fans after clashes on Wednesday. It was the fourth time English fans have been involved in violent incidents since the start of the European Championship tournament. Meanwhile, a Russian far-right agitator was among 20 fans to be thrown out of France as authorities try to maintain the peace surrounding the event, second only to the World Cup in importance to soccer fans worldwide. The troubles started Saturday, when violent clashes between Russian and English fans exploded in Marseille ahead of their match, which resulted in a 1-1 draw.

Add your views to Mike’s take on the market or any other issues below.

The Money and Markets Team

Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.

{28 comments }

StephenThursday, June 16, 2016 at 5:11 pm

Mike what would be the catalyst for a rise to 2,400? Excessive bearishness? European bank failures? Chinese deflation?

The perma-bulls have been saying this for over a year now. I would never bet against this algo-driven speculative orgy, but my expectation is we will get a correction before we get a breakout to the upside. Besides, the Fed needs a crisis to reverse course and launch QE4. It seems to me, the algos know this.

Bob PorterThursday, June 16, 2016 at 5:13 pm

The plethora of recommendations to buy gold add to your pessimism on the markets. And gold hasn’t even bottomed yet. Watching day to day I have been slowly unloading my negative buys. Like your contrarian position.

RichardThursday, June 16, 2016 at 5:18 pm

My bones usually tell me which way the stock market will go. Bones know.

MikeThursday, June 16, 2016 at 5:20 pm

Mike
Don’t you want to look at fundamentals? Is there a reason why investors are bearish. You betcha. Look at debt. Europe is imploding. Banks (e.g. Deutshe bank) are not doing well. So, while historical data is interesting, don’t forget the fundamental that drive the market.

johannesThursday, June 16, 2016 at 5:44 pm

What inspired you to suggest TMV?

tommrThursday, June 16, 2016 at 5:57 pm

I love it when investors are really skeptical! I sure prefer this to a lot of investor confidence. As Sir John Templeton said, markets grow on skepticism! I really have to agree with you here that a market that has been moving sideways for a long time is set to rally higher at any time!

JimThursday, June 16, 2016 at 6:13 pm

First zero and now negative interest rates? Sooner or later investors are going to want a return on their capital. The place to do this is the Stock Market, Real Estate, and Commodities. The stage is set for an upward move in asset prices. When is the big question, but it’s coming. Jim

JimThursday, June 16, 2016 at 6:57 pm

Quote of the day: ” A pessimist is a well informed optimist.” Jim

LeroySaturday, June 18, 2016 at 4:49 pm

Jim, What do your bones tell you now?

Douglas A.JohnsonWednesday, June 22, 2016 at 8:43 am

Yes….and which bones are we speaking of? D.

Paul BThursday, June 16, 2016 at 6:46 pm

Other than a pure contrarian move, it’s hard to find any reason to expect a rally from here, what with all the dismal economic data coming out lately, which is always massaged to look less bad than it actually is. But stranger things have happened…

Stu phillipsThursday, June 16, 2016 at 7:05 pm

I don’t think I would place much emphasis on historical data under the present circumstances. Unsustainable sovereign debt, worldwide terrorism , cyber threats, demographics, trade imbalance, the craziest presidential election in recent history , the US deeply divided by ideology—nothing is normal !

DavidThursday, June 16, 2016 at 7:20 pm

I agree with Larry Edelson, the American stock markets will rise. The economic outlook for so many nations is quickly becoming bleak. With so many $US dollars around the world, non-Americans going to continue to cash in. Commercial real estate in the U.S. and T-bills are no longer appealing. For the long term, big-cap American corporations (especially global) are!

ernestThursday, June 16, 2016 at 7:45 pm

I need to id someone who can inform me of two-four stocks a month I can purchase and sell at a profit. I require when, what, price and when to sell after profit is made! Do you do this with a high % rate and how much to join and any return on program if one is unsatisfied?

HerbThursday, June 16, 2016 at 7:50 pm

Mike.

I am a voracious reader as I am sure you are; but almost all the commentary I have run across over the past several months warns that investors should begin building cash reserves, buy gold (and silver?), sell stocks that don’t hold up well in a downturn, then do buy stocks that tend to hold their value, and prepare for a serious recession.

At a minimum I would strongly recommend that Americans follow the suggestions listed above, plus take care of current medical and dental problems, make sure any vehicles owned are in good condition, make any needed home repairs, update your cell or smart phone, pay off your credit card debt, lay in a supply of non-perishable food, buy a gun or two, plenty of ammo, and ensure everyone in the family knows how to handle weapons and shoot strait.

BillThursday, June 16, 2016 at 8:23 pm

The rates of increasing costs of products that people are forced to buy by law (medical insurance and automobile insurance) and rates for necessary expenses (utilities and property taxes) frequently increase at faster rates than the rate of general inflation, while wages and salaries grow at less than the general rate of inflation. That is a sure formula for the ruination of the middle class and for the softening of markets corporations need for sustainable and growing profitability.

quickresponseThursday, June 16, 2016 at 8:59 pm

Bull’s Eye! Good analysis Mike!

RickThursday, June 16, 2016 at 9:04 pm

Out of your mind? Not likely to happen, man.
But how about applying your same chart theology to GOLD.
It just moved past its previous high over 1300 again.
Sure it settled down a little but now watch for 1400 getting breached in October.

Donald PollockThursday, June 16, 2016 at 9:50 pm

The market will only go up if the Fed continues to buy securities, regardless of the major events happening in the world and regardless of the economic indicators that most of us learned were the measures of stock values.

FrankThursday, June 16, 2016 at 11:24 pm

The stock market is done. I got out in January. All risk, no reward.

DaNeilFriday, June 17, 2016 at 6:02 pm

My Investments* in the Stock-Market are now valued at “half” my initial-Investment(s).
The Stocks* won’t even sell at half-the-value I paid for them. Should I take-a-Loss* and
get the hell out of the Market; or should I “Hold” and Hoope* to weather-it-thru? I don’t kno!
I believe the “Companies” I have Invested-In* are relatively strong. …Guess we’ll see!!!
~But of course I am Hoping* for at least getting back my Initial-Investment*. *Thank You..

DaNeilSaturday, June 18, 2016 at 6:20 am

Does Anybody Think The Markets* will rebound, and when?

S.EdupugantiSaturday, June 18, 2016 at 3:36 pm

Apparently, the only catalyst for the mark 2400 or 2500 is ,by a chance or a choice, of FED’s near ZIRP till 2017…..Every other trigger else could be supplementary !

LeroySaturday, June 18, 2016 at 4:52 pm

DaNeil

I have no earthly idea.

LeroySaturday, June 18, 2016 at 4:53 pm

My comment is what I thought.

GianfrancoMonday, June 20, 2016 at 8:04 am

I don’t think of a market crash in the election year. Wall Street is not cheap, but look around in the world: do you see any safer place?

JeffMonday, June 20, 2016 at 11:07 pm

While looking for investments in late 1999, it became apparent that EVERY asset class was over valued, led by technology……, the DOW subsequently dropped by 40%!
While looking for investments in late 2007, it became apparent that EVERY asset class was over valued, led by housing……, the DOW subsequently dropped by 55%!

While looking for investment in mid 2016, it appears that EVERY asset class is over valued or in depression, led by central banks!

* The stock market is hitting historic highs
* The housing market is hitting historic highs
* The commercial real estate market is hitting historic highs
* The bond market is at extreme levels
* The gold market is in correction
* Commodities are in a depression

REASONS TO WORRY!
* This correction is one of the longest since WWII
* The velocity of money is at a 70 year low
* Bond rates are at a 500 year low
* The labor participation rate is at a 38 year low
* Home ownership is at a 51 year low
* Housing prices are back to where they were in 2007
* Consumer debt is back to where it was in 2007
* More people are on food stamps than ever before
* Stock market margin is at all time highs
* DOW PE ratios are in the 2000 and 2008 range
* DOW Purchase volumes have been in decline since 2010
* China has 250% debt to GDP
* Japan has 250% debt to GDP
* The Euro zone is in disfunction and recession
* 10 trillion in government debt is under negative rates
* Aging populations in developing countries equals less spending
* Commodities are in a depression
* Corporate profits are in a recession
* Student loan defaults are growing
* Auto loans defaults are growing
* England is threatening to leave the EU

I’m sure others can add to my list, but can someone, ANYONE give me a reason for this expansion to continue?

JamesSaturday, June 25, 2016 at 10:09 am

That England v Russia match was the best soccer match I have seen in a hell of a long time. Did you see the end of it. Russia nearly won it in injury time.